Since the set of risk/return combinations of stocks and gold would plot as a straight line with a negative slope (see the following graph), these combinations would be dominated by the stock portfolio. Of course, this situation could not persist. If no one desired gold, its price would fall and its expected rate of return would increase until it became sufficiently attractive to include in a portfolio. 2. Assume that the following two investment classes are available in the market: Asset | E(ri) | σi | Debt | 0.18 | 0.20 | Equity | 0.24 | 0.35 | Determine the portfolio standard deviation and expected return if you
Should rates rise unexpectedly, the borrower would have to pay the higher-than-expected interest rate. For instance, should the spot 90-day rate be higher than the forward rate of the month, the borrower will have to pay more for its funds. The main method for managing interest rate risk is to use a derivative which is an instrument that features a forward settlement (or maturity) date. It provides the hedger with a forward rate that
b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. A sinking fund provision makes a bond more risky to investors at the time of issuance. d. Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time. e. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.
Given the following Euro to $ Exchange rate of 1.46, what is the information contained in this quote? If the Purchasing Power Parity Theory is correct, what is true about the relationship between the US dollar and the Euro at this exchange rate? a. 3. A US multinational company is required to report its financial results in US dollars.
By using this method the income statement shows a higher income due to the lower value of the cost of goods sold. The balance sheet would also show a higher value for the inventory that is on hand. ABC Company wanted to show that their expenses were lower and their income was higher than what it actually was, resulting in a higher retained earnings value at the end of the period. To the public, it would look as though the company is thriving and paying out larger dividends to stockholders. Stockholders may assume when reading the financial statements that they would be receiving a higher return each month or quarter when in reality that would not be the case especially if they are planning on switching to LIFO.
Jane Smith tax issues: Issue a) What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes? Jane questioned whether they should take the $300,000 fee and use it to pay off their house, so that they could purchase a bigger house. She is asking if they should pay off the current house first and purchase a new one; or, buy a new house first and then sell the old house. Applicable Law & Analysis: The tax savings from the mortgage interest is only based upon the additional amount that the itemized deductions exceed the standard deduction. (Military.com, 2012).
Is the use of a monthly average price a net advantage or disadvantage to J & L? Using NYMEX contracts will minimize the asset mismatch aspect of basic risk, along with a better liquidity. However, since diesel fuel is not a traded commodity, it cannot be directly hedged and J&L will suffer a certain amount of basis risk. J&L will also need to post a margin for their future contracts at NYMEX. Using product offered by Continental Bank would require a higher cost for J&L, and illiquid compared with NYMEX.
What is ABCs expected share price post exercise of warrants? What is the yield on ABCs bonds with warrants? Solution: The price of ABC’s straight bond at time of issuance is B= 1, 000 + $50 $50 $50 + ... + + 2 1 + 10% (1 + 10%) (1 + 10%)20 1 − (1 + 10%)−20 $1, 000 = $50 × + 10% (1 + 10%)20 = $574.32 The value of a warrant at time of issuance is W = $1, 000 − $574.32 = $21.28
2-How does this value affect the choice of securities in which to invest? Ans. This valuation shows that the cost of the equity is more than that of the cost of the debt. The H partners should finance the six flags through debt rather than that of the equity. The plan assigned 95% of the Company’s equity to SFO bondholders and 5% to SFI bondholders.
Financiering 6012B0217 Financiering Case 2012/2013 Vraag 1 a) Excel regression (ongecorrigeerde beta) equity beta van ING: 1.972874 ASML: 1,002967 Ahold: 0,395736 b) We know that there is a linear relationship between the stock beta and its expected return. So, if there is fewer stock the security market line will be steeper so, the beta will be smaller. Vraag 2 ßu = ßa= (E/(D+E)) x ße Net debt: Interest Bearing Debt – Cash and Cash Equivalents ING: 47284/(1234038+47284) x 1,972874 = 0,07280 Debt: 1247110-13072=1234038 ASML: 2773908/(1456616+2773908) x 1,002967 = 0,65763 Debt: 3406450-1949834=1456616 Ahold: 5910/(6215+5910) x 0,395736 = 0,192891 Debt: 8815-2600=6215 Vraag 3 a) ASML has a higher asset beta because it participates in an market which develops faster, so it has a higher systematic risk. Ahold has a lot of more diversity on his business. Ahold can better spread his risk.